As if workplace stress wasn’t bad enough, the Coronavirus is 2020’s new black cloud hanging over society.
Historic unemployment rates, contracting economies and crippled supply chains have in part contributed to both employee and employer uncertainty.
5 recent stimulus activities were passed in March 2020 that you need to know about:
- Federal student loan interest is waived (0%) through September 2020. These loans include:
- Defaulted and nondefaulted Direct Loans
- Defaulted and nondefaulted FFEL Program loans
- Defaulted and nondefaulted Federal Perkins Loans
- Defaulted HEAL loan
- *loans held by a) a commercial lender or b) the educational institution may not be eligible and you should contact your lender.
- 20 million debt holders may benefit from automatic suspension of payments. Federal student loan interest is waived for the next six months. 85% of your employees with student loan debt will benefit from some short term relief.
- Borrowers who are already enrolled in the Public Service Loan Forgiveness Program won’t have to make ANY payments for the next six months. BONUS – they will still receive a ‘credit’ for the payments (as if they were paying), but they don’t have to pay anything. The one catch we identified is that they are required to be working full time by a qualified employer.
- The Department of Education is also refunding any garnishments made since March 13. ~830,000 borrowers will receive more than $1.8 billion back from garnishments that will be retroactively forgiven.
- CARES Act Sec. 2206(B)), includes tax incentives for employers who offer student loan repayment as a benefit.
Who Benefits from the CARES Act
Loans owned by the Department of Education qualify by default for the CARES Act relief. These borrowers are in the most advantageous position to benefit from the CARES Act.
Eligible loans owned by the DOE will be automatically adjusted to benefit from the legislation.
Private Student Loan holders may not benefit as much.
The lender or school is NOT required to adopt the CARES Act benefits for Federal Family Education Loan (FFEL) Program and Federal Perkins loans. However, the lender or school may adopt their own benefits though there is no requirement by law.
Say Goodby to Student Loan Benefit Taxes
One of the most frequently asked questions we get at Workforce Perks is about the tax benefits.
Before March 27, 2020 employer sponsored Loan Repayment existed as a taxable benefit. Employers were required to foot the bill for payroll taxes in addition to withholding income taxes.
Our typical response to a prospective partner asking about a tax benefit was to help them understand the financial impact to both the employer and employee by implementing a flexible match loan perk.
Helping a team member create a plan that can cut their pay-back period in half is enough to incentivize the employee to stay in the same job an additional 5 years.
We all know how expensive it is to replace an employee. It’s ~20% of their salary.
So, if you’re really that concerned about a tax break, consider that losing an employee making $40k will cost you $8k to replace. You’re definitely not getting an $8k break in taxes. Anyways…
Student Loan Contributions NOW Pre-Tax
Section 2206(B) of the “CARES Act”, includes tax incentives for employers who offer student loan repayment as a benefit.
This tax incentive is available until January 2021 when it will be up for review again.
There’s been legislation already in the works for provide a tax incentive even before the CARES Act, so there’s a good chance this will be the catalyst for a longer term benefit.
The Employer Participation in Repayment Act (1043/S. 460) is the basis for the inclusion in the CARES Act.
Employers are able to contribute up to $5,250 in pre-tax dollars per year to employee student loans via a Section 127 plan.
How to Setup a Section 127 plan:
- Make sure you comply with IRS requirements for Section 127 Plans here.
- Next, your company will need to adopt or amend an existing 127 plan to integrate the Student Loan Repayment plan.
- Start making contributions and record them on payroll as pre-tax.
This is a win-win for both employees and and employers:
- Employees will benefit from an extra ~$0.30 on the dollar (depending on their tax bracket) because employers won’t need to withhold their contributions for taxes.
- Employers will immediately see a reduction in FICA, FUTA, and SUTA payroll taxes which stay on the balance sheet.
Surge in requests for a student loan benefit
The time to act is now.
The Student Loan Benefit was already the hottest employee requested perk for 2020.
Once this information starts making its way into your employees Twitter feeds, be prepared for a surge in requests
Workforce Perks will help you with digital enrollment, loan verification, support, payments and reporting.
We’ll continue to update this post as we learn more.
Set up a call with one of our experts today by emailing [email protected]
Should I pay my Student Loan during CARES Act forbearance?
Payments made during this period of forbearance (0% interest) will be applied to the principal loan amount. This can create an opportunity for those who are financially secure.
Compound interest is a beautiful thing when it works in your favor.
For example: A $30,000 loan with at 4.66% over 10 years has a monthly payment of $313. The total lifetime costs of your student loans would be $37,588 paid over 10 years.
Here’s what it looks like if you continue to make your $313 payments for 6 months applied to the principal…
Monthly payments would be $294 and the total lifetime costs of your student loans would be $35,235 if the the loan is paid over 10 years.
You could net a savings of ~6% or $2,353 over the lifetime on your loan and reduce your monthly payment by $19 per month.
*Bonus, if you kept paying the $313 (original monthly payment), the total lifetime costs of your student loans would be $34,697. You could net a savings of 7.7% or $2,891 if the loan is paid.
Payments and automatic withdrawals are on hold through September, 30 2020. Garnishments are being refunded and interest is waived.
Those who are NOT in a strong financial position, there may not be enough benefit to continue making any payments on eligible Federal Student Loans.
In addition, depending on the severity and duration of the economic impact induced from the pandemic, we’d be surprised if there isn’t another round of extended relief.